It is no longer a question of if the global economy is headed toward a recession but rather a matter of when this is likely to happen.
If the behavior of many of the world’s largest central banks in terms of acquiring gold assets is any indication, I can safely assume that the long-predicted economic meltdown will soon be upon us.
However, the secret is out and investors now know that precious metals protect investment portfolios from the negative effects of inflation.
Gold, in particular, has shown a remarkable negative correlation with the rate of inflation and is worth considering as your best option in terms of finding an inflation hedge.
Inflation is an economic phenomenon whereby the prices increase for all basic commodities at the same period that the value of a currency drops.
The negative effects of rising inflation are seen in all sectors of the economy, from rising interest rates, an unstable consumer price index, and the crashing of the stock market. When inflation reaches the point of hyperinflation, then we have a full-blown economic crisis on our hands.
However, as bad as inflation is, it does not affect all asset classes in the same way. Particular investments seem to be immune from the effects of rising prices. Such an asset is regarded as a hedge against inflation and a great example is gold and other precious metals.
How Does Inflation Affect Gold Prices?
As soon as the threat of inflation becomes a real possibility, shrewd investors prefer you invest their money in gold and silver. This is mainly because historically, the price of gold tends to go toe-to-toe with the rate of inflation.
This means that whatever value your gold has today, it will still be just as valuable tomorrow regardless of how much inflation is rising daily. Gold, silver, and other precious metals are therefore considered to be a hedge against inflation and great asset classes to own in times of economic turbulence.
If you want a good indicator of why precious metals, such as gold and silver are great assets to buy right now, look at how the central banks of powerful countries, such as Russia and China have been buying gold in recent years.
These countries are preparing for the day when the buying power of paper money is reduced to nothing and the only ones left standing are those who were wise enough to invest in gold.
How and Why Gold Is a Good Inflation Hedge?
What makes gold and other precious metals the perfect hedge against inflation? To understand why gold is a good inflation hedge, you have to look at the data from previous times when the world was plunged into economic turmoil.
This means looking at how gold prices performed during specific periods in history, such as World War I and II, as well as the Great Depression. The market data tells the following story about precious metals, particularly physical gold:
Gold Holds Value for Longer
Investor sentiment towards the value and price of gold seems to remain unaffected regardless of how bad the economy is.
We have already established that during times of inflation, gold, and silver prices increase at the same rate as the rise in the cost of basic commodities. This means gold prices will be very high during such times but for some reason, people will still be willing to buy it.
What this shows us is that no matter how bad the inflation rate becomes, the value of gold will remain unaffected meaning it is a great asset to have at such times.
The Demand for Gold is High
Beyond being regarded as one of the most beautiful precious metals, gold has real intrinsic value that is not diminished by the rate of inflation. This is because gold has a lot of important uses, such as:
The manufacture of some of the most exquisite and expensive pieces of jewelry, some of which are in high demand in countries such as China and India where they are used during weddings and religious ceremonies
Gold is used in investing, not only by individuals but by central banks as well, which buy gold bullion by the ton and store it in large quantities secured in federal reserve bank vaults across the globe
It is a major component of modern electronics and computers
Gold has specific properties that are essential to modern medicine, such as its antimicrobial action
Some of the most important components in aerospace engineering are made of gold
Precious Metal Prices Do Well in Times of Economic Uncertainty
Looking back in history, we see that the price of gold rose each time there was significant economic uncertainty. Considering that we are currently experiencing that same period of uncertainty ever since the end of the Covid-19 pandemic, it would seem that now is the best time to buy gold.
The gold, silver, platinum, and palladium prices we see now are only going to go up in the following months and years. In many countries, inflation began some years ago and they have been seeing regular interest rate hikes for some time as they try to combat inflation.
What this means is that there is not going to be a better time to buy gold than right now. If you were waiting for gold and consumer prices to fall, history tells us that is unlikely to happen any time soon, which is why so many investors are already rushing for the safe haven offered by gold investments.
Looking For Secure Inflation Hedges? Buy Gold Bullion Today!
The fact that precious metals protect investors from inflation and runaway interest rates caused by some of the many global factors we are experiencing now should be enough to convince you to start investing in gold.
Very soon the purchasing power of the money in your bank account may be devalued to the point where you will hardly be able to buy anything at all. At that point, you will wish that you had invested in a certain yellow metal that is protecting so many investors around the world.